Maintenance providers, beleaguered by the downturn in flying, are looking to emerging markets like China for future revenue streams, writes Sandra Arnoult in Washington
There is no argument that the past few years have given the maintenance, repair and overhaul sector a rough ride. Airlines have cut capacity and parked aircraft. The simple fact is that fewer aircraft flying means a drop in business. And, unfortunately for the MRO service providers, the news going forward is not too bright either.
This year total MRO expenditure is expected to decline 5%, dropping to $41.8 billion from $44 billion in 2009, according to a report from consultancy firm AeroStrategy. But the 2009 figure was already 7% down on 2007, when MRO spending peaked at $45 million. The Airline Business annual maintenance snapshot (see our November 2010 print edition) shows maintenance expenditure for 20 leading carriers in 2009 nearly 3% down on the previous year.
Even so, savvy MRO providers regarded the downturn as an opportunity to gear up for the next round and prepare for the uptick in business. "We've certainly seen an increase in demand as aircraft operators and owners revisit maintenance that had been deferred over the past few years and as more aircraft are returning to active service," says Leonard Kazmerski, vice-president marketing and business development for Timco Aviation Services, an MRO that provides airframe and engineering services as well as interior design and installation.
"Over the past year, we have seen a slow return of volumes for each of our business segments. As airlines have begun to see load factors increase, capital for newly refurbished cabins and funds for deferred maintenance are returning," says Kazmerski. An example of this is UK carrier bmi, which is rolling out a refit of its cabin interiors (see page 37).
In September, Timco expanded its widebody maintenance centre in Macon, Georgia. In June, it opened a line maintenance centre in Panama City, Florida, following the opening of new facilities in Boston, Massachusetts and Denver, Colorado.
"We see many opportunities for growth and we have been taking steps to take advantage of this throughout the economic downturn," Kazmerski says. For example, in response to the high price of fuel, Timco developed its new FeatherWeight line of cabin interior products designed to reduce overall weight of the aircraft, says Kazmerski. "The challenges our customers face present us with some of the best opportunities to grow by helping them to succeed."
OUT OF ADVERSITY
SR Technics deputy chief of maintenance Emil Frehner concedes that the last two years have been difficult for the aviation industry. "There's been a larger MRO capacity in the market because of grounded aircraft," observes Frehner. But he continues: "Depression is when you have an opportunity."
The company was acquired by Abu Dhabi-based Mubadala Development in 2009. During the downturn, SR Technics began developing a new facility in Malta for narrowbody MRO that will employ 150 people by year end. Initially, easyJet Airbus A320s will be the first aircraft processed by the Malta facility. By 2012, it plans to have the capability for Boeing 737s. Meanwhile, SR Technics' Zurich site focuses on high-value, specialised work, as well as cabin modifications.
In July, SR Technics won an A320 cabin modification tender with Qatar Airways. Work for this new contract will be performed at its Zurich facility. It also won a five-year contract with UK's Thomson Airways to provide integrated component solutions, proving that business wins are still possible despite the poor economic conditions.
Moreover, as the purse strings tighten, Frehner believes airline customers are looking for the full range of "fleet management services. Some of our customers have decided that in-sourcing was more expensive than staying with us."
SR Technics also has an office in Hong Kong, primarily for engines and components, but despite continued industry attention on emerging markets such as China and India, Frehner says: "There are no plans now to expand in the Far East, but there is always the opportunity."
In a recent forecast, Boeing projects that the commercial aviation industry will need 596,000 maintenance personnel over the next 20 years to accommodate the "strong demand for new and replacement aircraft". Of that number, the Asian Pacific region will need 220,000 while China will need 96,400 workers to support aircraft maintenance.
Looking to tap this potential, ST Aerospace has already begun MRO operations in China, opening a new hangar this year at Pudong International airport in Shanghai. It also has plans to set up another MRO facility in Guangzhou. "We also expect our engine facility in Xiamen to be operational by the end of 2010," says Chang Cheow Tech, president ST Aerospace. "This will bring our Chinese operations to a total of four and we hope to be able to better support our customers flying into and operating in China." These customers include China Eastern, China Southern, Spring and Xiamen Airlines.
"We are always on the lookout for continued growth and we definitely see opportunities moving forward, but we will not take up every business opportunity we see," Chang says. "We will have to evaluate and see if it makes business sense for us to make that investment. When we decide on partnerships, we will discuss and weigh the pros and cons and select the best option that is advantageous to our business."
Lufthansa Technik is also well positioned to provide MRO services in China, having established Ameco, a joint venture MRO with Air China in 1989. The Beijing facility handles maintenance for Air China. "We do a lot of third party work for Chinese customers and other carriers around the globe," says Lufthansa Technik board chairman August Henningsen. But he adds a cautionary note about the Chinese market. "Airplanes are relatively new. New fleets require less MRO." Nevertheless, he continues, "the growth pattern is very positive".
In the past year, business has been brisk for Ameco. United Airlines signed a five-year deal to provide heavy maintenance for its Boeing 747s/777s; China's Great Wall Airlines signed on for heavy maintenance on its 747-400 freighters; and it extended a service contract for the joint venture Cathay Pacific/Air China cargo operation operations.
But while markets like China might offer some opportunities, MRO operators are at the same time facing robust competition from the original equipment manufacturers, which have a significant advantage, particularly with engine services. "I think the OEM market share and dominance - especially in engines and components - are potentially driving out choice," says Jonathan Berger, senior vice-president for SH&E Consulting. "In the long term, when there is limited choice, it's typically not good for customers."
Tom Gentile, president of GE Aviation Services, believes manufacturers have the edge based on volume of work and engineering technology. "No matter how big you are as an airline, you are only seeing a small fraction of an entire fleet of engines," Gentile explains. "We have the benefit of looking at all the maintenance, on all of the engines." With fixed monthly packages available, airlines have the advantage of cost consistency. GE currently has 23,000 engines in service.
Gentile says the company has responded to the growth markets in China and India through partnerships. In China, it works with HAECO, which also provides comprehensive line to heavy maintenance packages, including aircraft component overhaul support. GE has also teamed with Air India to become a "globally branded business partner".
"We've worked hard to develop a network of partners that can provide support," Gentile says. "It's not complete in terms of filling out our network, but we have a very clear roadmap of where we want to go."
A major challenge for this OEM is developing systems to manage an increasing amount of data collected from technologically sophisticated engines and sensors. Gentile says: "We've collected more than 1.5 terabytes of information. Being able to collect, store, process, analyse and help customers make sense of it is becoming increasingly important."